BEA revised GDP growth down from 2.4% to 1.6% percent in the second quarter, indicating the slowdown in economic activity was worse than originally thought. The revisions primarily raised imports and lowered private inventory investment and exports, subtracting from growth, but also increased personal consumer expenditures, partially offsetting the decline.

The downward revision adds fuel to the fire in the double dip recession debate, but the consensus remains that we will avoid that outcome. We’ve lowered our forecast of growth through the end of the year as the early indicators of weaker than expected economic activity accumulated, but we still expect solid improvement in the next two quarters as the economy gains momentum and shifts into robust recovery, rather than stagnation.

Despite accentuating the already recognized slowdown in GDP growth, today’s report is not completely without positive aspects. Signs of improvement in personal consumption and income bode well for strengthening conditions in the coming quarters, as do continued increases in corporate profits. Improving demand overall can be seen in growth in real gross domestic purchases, purchases by US residents wherever produced, which increased 4.9% this quarter and 3.9% last quarter. The growth in imports subtracts from GDP growth, but its stoking of real gross domestic purchases is a signal that demand is there. Translating this into employer confidence, hiring and domestic production would be a step in the right direction.

From the home builders’ perspective, the 27.2% growth in fixed residential investment contributed 0.58 percentage points to overall second quarter growth, but this lift is likely to fade as construction slows in the third quarter in the wake of the expiring tax credit. A positive contribution to growth from fixed residential investment will resume in the fourth quarter, as activity picks up and gains momentum through 2011 and 2012.